Consumer Prices Slightly Above Expectations

Emerging pressure in medical costs and steady pressure in housing are providing fundamental lift to consumer prices which in July rose 0.3 percent for both the headline and the core. Both of these results are 1 tenth above expectations as are the respective year-on-year rates, at 1.8 and 2.2 percent. These results narrow the rate-cut elbow room for the Federal Reserve.

Versus a noticeable 0.4 percent rise in June, medical care services in July rose 0.5 percent. Year-on-year, medical care is up 3.3 percent. Housing costs in July rose 0.3 percent for a second straight month with this rate up 3.0 percent on the year. These rates, which together make up about half of all consumer prices, are well above the Fed's general 2 percent target and are offsetting lower levels of pressure in other prices.

Apparel prices have been very subdued but are also showing recent pressure, up 0.4 percent in July following June's 1.1 percent jump though they are still in contraction year-on-year, at minus 0.5 percent. Vehicle prices are also subdued, up 0.3 percent on the year for new cars & light trucks and 1.5 percent for used vehicles which showed a monthly 0.9 percent burst higher in July. Tobacco also showed July pressure with a 1.0 percent monthly gain and a 5.4 percent yearly rate. Airline fares were also higher in July, up 2.3 percent though this yearly increase is only 1.3 percent.

Energy prices rose 1.3 percent on the month with gasoline up 2.5 percent but energy prices have been coming down this year, at minus 2.0 percent overall. Food prices were unchanged for a second month with this yearly rate at plus 1.8 percent.

Three tenth gains for the monthly core are rare and a back-to-back 0.3 percent gain is even more rare with June and July this year showing the most two months of core pressure since 2005. Whether some of this emerging pressure is tied to higher tariffs is hard to pin down in the data but questions over this possibility are certain to be discussed by the Fed. Whether including food and energy or stripping them out, consumer prices may be turning higher and pose a counter-policy signal for extension of lower rates.